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Guide to Employee Share Plans

There are a number of share plans some of which work by being an option to acquire shares.  This note is a brief guide as to how share plans can benefit small private companies by incentivising key staff to help increase the value of the company.  Share plans (or employee share schemes) are also beneficial for companies unable to pay higher salaries but want to give staff the rewards and incentives they deserve and give them the enthusiasm and commitment to help move the company forward in effect, working with the same mind set as the business founders.

This blog looks at some of the concerns raised by owners of small and medium sized companies.

 “Won’t I lose voting control?”

No, loss of control can be avoided by:

  • Making sure that the number of shares issued under a share plan (be it an option plan or non option plan) will not affect voting control.
  • Putting in place a share option plan which means there will be no loss of votes on shares until the option is exercised such as when about to sell the company.
  • Using non-voting shares.
  • Using a phantom share plan.

 “But some of the value or potential value in the company will be lost”

Whilst you might be concerned that you will lose some of the value of the business if you transfer some of your shares to employees you need to bear in mind that:

  •  It is your key employees who will help you maximise the value of the business and a share plan will help you both retain and attract talented employees who will help you achieve this.
  • If you were to opt for a tax-advantaged share plan (there are both tax advantaged share plans and non tax advantaged share plans)  you can in fact, reduce your company’s tax and NICs bill thereby reducing employment costs.
  • If you achieve full market value for the company you would not lose out as those employees you have incentivised would have helped you get to that point.  In any event, some share plans can be set up so that employees only benefit if certain performance conditions are met.   So, a share plan can be self-financing.

“Does setting up a share plan mean I have to give away shares?”

  •  Share option schemes such as EMI options, SAYE options and CSOP option plans are all options to buy shares at a preset price and are thus not given away.
  • SIPs and SAYE * option schemes involve employees buying shares in the company.
  • An Employee Benefit Trust can be used to buy the shares and then used together with a share plan to recycle the returned shares for other employees.

 “There is no market for the Shares”.

For share plans to operate and be attractive, an employee must be able to sell their holding and appropriate mechanisms would be needed, such as:

  • Tying in share incentives to an exit event.  If wanted, you could have an exit only plan thereby ensuring that an employee will only be able to exercise the option in the event of a company sale or floatation.
  • Creating and funding an Employee Benefit Trust to buy shares from employees so creating an internal market.
  • You may not want non-employee/outside shareholders but would be happy for employees to own shares provided their shares cannot be transferred to non-employees or for ex-employees to keep the shares. This can be avoided by putting in place appropriate legal protections including stopping employees selling the shares to outsiders.  This could be dealt with by having leaver provisions which provide for the compulsory transfer of shares from ex-employees (or their estates), perhaps at market value for good leavers (those who leave due to poor health, death or retirement, or with the company’s approval), and at the lower of market value and the price paid for the shares in the case of bad leavers those who are dismissed for misconduct or poor performance, and perhaps those who leave voluntarily, (perhaps to work for a competitor).
  • In a share ownership arrangement (rather than an option) you may not want the employee shareholder to receive the same rate of dividends as the existing shareholder(s).  This can be dealt with by setting up a  separate classes of shares which has a different dividend entitlement.

The next posting of this guide will consider the different ways you can incentivise staff through use of a share plan

If you would like to discuss share plans then I am very happy to do so without charge or obligation, Call Jane Latham: 01225 287516

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